Q2 show, lower gold prices and expansion may help sustain Titan's rally

The Titan Company’s (Titan) outperformance since the beginning of August is expected to continue after it indicated in its September quarter update on Wednesday a strong recovery in demand.

Sales across segments have either surpassed or are close to the pre-pandemic level. As a result, most brokerages have upgraded their earnings estimates for financial year 2022-23 (FY23) and FY24 and increased the stock’s target price.

The stock rose 10.7 per cent on Thursday, adding to the 25 per cent increase it has seen since the beginning of August, which is double the rise of the Sensex.

Pent-up demand and deferred purchases across weddings, gifts, investments and occasions led to a 78 per cent year-on-year (YoY) jump in the core jewellery segment. Growth in watches/wearables and eyewear were above 73 per cent each over the year-ago period.

Within its core jewellery segment, both the plain and studded portfolios grew in double digits. However, higher sales of the former meant that the proportion of studded jewellery was lower than what it was before the pandemic. This could impact margins in the quarter.

The other positives are lower gold prices, higher festive and wedding season sales, and market share gains.

Says Shirish Pardeshi of Centrum Research: “We expect stable gold prices, pent-up demand driven by wedding deferrals, and improving share of studded jewellery to drive up both revenue and margins. With improved execution and enhanced visibility on revenue and earnings growth, we expect Titan to outperform peers.”

Gold prices, which recently hit a six-month low, could have a significant bearing on demand and are expected to be a key trigger for the largest organised jewellery player in the country.

Moreover, the lower prices come just ahead of the festive season and amidst an improvement in discretionary spends across sectors. Lower prices could also spur investment demand. Titan recently launched digital gold products as an investment vehicle targeted at the youth. Further a higher share of studded jewellery will add to revenues and margins.

Regulatory changes like hallmarking requirements could help firms like Titan. Vishal Gutka and Binay Shukla of PhillipCapital India believe hallmarking could drive market share gains from the unorganised sector, which has prospered through practices such as under-caratage and keeping making charges low. These practices are about to end from FY23 once hallmarking norms are implemented.

What should also help is its accelerated store additions over the last few years, with Tanishq stores doubling over the last seven years, and especially since FY18. The current count is 414 stores.

“With most regional jewellers facing liquidity issues and cutting down expansion, Titan is in a sweet spot to expand its presence and continue to grow faster,” according to Antique Stock Broking.

The stock has rallied 90 per cent over the last year and is trading at 75 times its FY23 earnings estimates. Despite this, brokerages believe there could be more upside. Prabhudas Lilladher expects net profit to grow 45 per cent over FY21-24 and has a target price of Rs 2,555. Investors can look at the stock on dips.